History 101

(Originally published September 18th, 2012)

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive. All kinds. The military kind. As well as the social kind. And the Sixties gave us a couple of doozies. The Vietnam War. And the War on Poverty. Spending in Vietnam started in the Fifties. But spending, as well as troop deployment, surged in the Sixties. First under JFK. Then under LBJ. They added this military spending onto the Cold War spending. Then LBJ declared a war on poverty. And all of this spending was on top of NASA trying to put a man on the moon. Which was yet another part of the Cold War. To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending. And it carried over into the Seventies. Giving President Nixon a big problem. As he also had a balance of payments deficit. And a trade deficit. Long story short Nixon was running out of money. So they started printing it. Which caused another problem as the US was still part of the Bretton Woods system. A quasi gold standard. Where the US pegged the dollar to gold at $35 per ounce. Which meant when they started printing dollars the money supply grew greater than their gold supply. And depreciated the dollar. Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead. Something the Americans couldn’t depreciate. Nations exchanged their dollars for gold. And began to leave the Bretton Woods system. Nixon had a choice to stop this gold outflow. He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending. Or he could ‘close the gold window’ and decouple the dollar from gold. Which is what he did on August 15, 1971. And shocked the international financial markets. Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven. As they hated the gold standard. The suspension of the convertibility of gold ushered in the heyday of Keynesian economics. Even Nixon said, “I am now a Keynesian in economics.” The US had crossed the Rubicon. Inflationary Keynesian policies were now in charge of the economy. And they expanded the money supply. Without restraint. For there was nothing to fear. No consequences. Just robust economic activity. Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency. Because it was as good as gold. As our trading partners could exchange $35 for an ounce of gold. Which is why we priced international assets in dollars. Like oil. Which is why OPEC had a problem with the Nixon Shock. The dollars they got for their oil were rapidly becoming worth less than they once were. Which greatly reduced what they could buy with those dollars. The oil exporters were losing money with the American devaluation of the dollar. So they raised the price of oil. A lot. Basically pricing it at the current value of gold in US dollars. Meaning the more they depreciated the dollar the higher the price of oil went. As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain. The boom. But shortly behind this inflationary gain came higher prices. And a collapse in economic activity. The bust. This was the dark side of Keynesian economics. Higher prices that pushed economies into recessions. And to make matters worse Americans were putting more of their depreciated dollars into the gas tank. And the Keynesians said, “No problem. We can fix this with some inflation.” Which they tried to by expanding the money supply further. Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War. And when the US supported their ally Israel the Arab oil producers responded with an oil embargo. Reducing the amount of oil entering America, further raising prices. And causing gas lines as gas stations ran out of gas. (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply. And a ceiling on domestic oil prices discouraged any domestic production.) The Yom Kippur War ended about 20 days later. Without a major change in borders. With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again. But the economy was still suffering from high unemployment. Which the Keynesians fixed with some more inflation. With another burst of monetary expansion starting around 1975. To their surprise, though, unemployment did not fall. It just raised prices. Including oil prices. Which increased gas prices. The US was suffering from high unemployment and high inflation. Which wasn’t supposed to happen in Keynesian economics. Even their Phillips Curve had no place on its graph for this phenomenon. The Keynesians were dumfounded. And the American people suffered through the malaise of stagflation. And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country. Disrupting their oil industry. And then President Carter put a halt to Iranian oil imports. Bringing on the 1979 oil crisis.

This crisis was similar to the previous one. But not quite as bad. As it was only Iranian oil being boycotted. But there was some panic buying. And some gas lines again. But Carter did something else. He began to deregulate oil prices over a period of time. It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US. Drawing the oil rigs back to the US. Especially in Alaska. Also, the Big Three began to make smaller, more fuel efficient cars. These two events would combine with another event to bring down the price of oil. And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil. He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979. He was the anti-Keynesian. He raised interest rates to contract the money supply and threw the country into a steep recession. Which brought prices down. Wringing out the damage of a decade’s worth of inflation. When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman. And suffered through a horrible 2-year recession. But when they emerged it was Morning in America. They had brought inflation under control. Unemployment fell. The economy rebounded thanks to Reagan’s tax cuts. And the price of oil plummeted. Thanks to the abandonment of Keynesian inflationary policies. And the abandonment of oil regulation. As well as the reduction in demand (due to those smaller and more fuel efficient cars). Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties. Bringing the price oil down to almost what it was before the two oil shocks.

History 101

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive. All kinds. The military kind. As well as the social kind. And the Sixties gave us a couple of doozies. The Vietnam War. And the War on Poverty. Spending in Vietnam started in the Fifties. But spending, as well as troop deployment, surged in the Sixties. First under JFK. Then under LBJ. They added this military spending onto the Cold War spending. Then LBJ declared a war on poverty. And all of this spending was on top of NASA trying to put a man on the moon. Which was yet another part of the Cold War. To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending. And it carried over into the Seventies. Giving President Nixon a big problem. As he also had a balance of payments deficit. And a trade deficit. Long story short Nixon was running out of money. So they started printing it. Which caused another problem as the US was still part of the Bretton Woods system. A quasi gold standard. Where the US pegged the dollar to gold at $35 per ounce. Which meant when they started printing dollars the money supply grew greater than their gold supply. And depreciated the dollar. Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead. Something the Americans couldn’t depreciate. Nations exchanged their dollars for gold. And began to leave the Bretton Woods system. Nixon had a choice to stop this gold outflow. He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending. Or he could ‘close the gold window’ and decouple the dollar from gold. Which is what he did on August 15, 1971. And shocked the international financial markets. Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven. As they hated the gold standard. The suspension of the convertibility of gold ushered in the heyday of Keynesian economics. Even Nixon said, “I am now a Keynesian in economics.” The US had crossed the Rubicon. Inflationary Keynesian policies were now in charge of the economy. And they expanded the money supply. Without restraint. For there was nothing to fear. No consequences. Just robust economic activity. Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency. Because it was as good as gold. As our trading partners could exchange $35 for an ounce of gold. Which is why we priced international assets in dollars. Like oil. Which is why OPEC had a problem with the Nixon Shock. The dollars they got for their oil were rapidly becoming worth less than they once were. Which greatly reduced what they could buy with those dollars. The oil exporters were losing money with the American devaluation of the dollar. So they raised the price of oil. A lot. Basically pricing it at the current value of gold in US dollars. Meaning the more they depreciated the dollar the higher the price of oil went. As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain. The boom. But shortly behind this inflationary gain came higher prices. And a collapse in economic activity. The bust. This was the dark side of Keynesian economics. Higher prices that pushed economies into recessions. And to make matters worse Americans were putting more of their depreciated dollars into the gas tank. And the Keynesians said, “No problem. We can fix this with some inflation.” Which they tried to by expanding the money supply further. Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War. And when the US supported their ally Israel the Arab oil producers responded with an oil embargo. Reducing the amount of oil entering America, further raising prices. And causing gas lines as gas stations ran out of gas. (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply. And a ceiling on domestic oil prices discouraged any domestic production.) The Yom Kippur War ended about 20 days later. Without a major change in borders. With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again. But the economy was still suffering from high unemployment. Which the Keynesians fixed with some more inflation. With another burst of monetary expansion starting around 1975. To their surprise, though, unemployment did not fall. It just raised prices. Including oil prices. Which increased gas prices. The US was suffering from high unemployment and high inflation. Which wasn’t supposed to happen in Keynesian economics. Even their Phillips Curve had no place on its graph for this phenomenon. The Keynesians were dumfounded. And the American people suffered through the malaise of stagflation. And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country. Disrupting their oil industry. And then President Carter put a halt to Iranian oil imports. Bringing on the 1979 oil crisis.

This crisis was similar to the previous one. But not quite as bad. As it was only Iranian oil being boycotted. But there was some panic buying. And some gas lines again. But Carter did something else. He began to deregulate oil prices over a period of time. It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US. Drawing the oil rigs back to the US. Especially in Alaska. Also, the Big Three began to make smaller, more fuel efficient cars. These two events would combine with another event to bring down the price of oil. And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil. He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979. He was the anti-Keynesian. He raised interest rates to contract the money supply and threw the country into a steep recession. Which brought prices down. Wringing out the damage of a decade’s worth of inflation. When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman. And suffered through a horrible 2-year recession. But when they emerged it was Morning in America. They had brought inflation under control. Unemployment fell. The economy rebounded thanks to Reagan’s tax cuts. And the price of oil plummeted. Thanks to the abandonment of Keynesian inflationary policies. And the abandonment of oil regulation. As well as the reduction in demand (due to those smaller and more fuel efficient cars). Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties. Bringing the price oil down to almost what it was before the two oil shocks.

History 101

It was Morning in America again because Ronald Reagan reduced the Misery Index by 42.7%

Ronald Reagan was a supply-sider when it came to economics. Of the Austrian school variety. In fact, one of his campaign promises was to bring back the gold standard. A very Austrian thing. The Austrian school predates the Keynesian school. When the focus was on the stages of production. Not on consumer spending. These policies served the nation well. They (and the gold standard) exploded American ingenuity and economic activity in the 19th century. Making the U.S. the number one economy in the world. Surpassing the nation that held the top spot for a century or more. Perhaps the last great empire. Great Britain.

Following the stagflation and misery (misery index = inflation rate + unemployment rate) of the Seventies Reagan promised to cut taxes and governmental regulations. To make it easier for businesses to create economic activity. Easier to create jobs. And he did. Among other things. Such as rebuilding the military that the Carter administration severely weakened during the Seventies (it was so bad that the Soviet Union put together a first-strike nuclear option. Because they thought they could win a nuclear war with Jimmy Carter as president). During the 1980 campaign Reagan asked the people if they were better off after 4 years of Jimmy Carter. The answer was no. Four years later, though, they were. Here’s why. (Note: We used so many sources that we didn’t source them here to save space. The inflation rate and unemployment rates are for August of the respective years. The dollar amounts are annual totals with some estimates added to take them to the end of 2012. The debt and GDP are not adjusted for inflation as they are only 4 years apart. Gas prices and median income are adjusted for inflation. There may be some error in these numbers. But overall we believe the information they provide fairly states the economic results of the presidents’ policies. (This note applies to both tables.))

Reagan entered office with some horrendous numbers. The Carter administration was printing so much money that inflation was at 12.9% in 1980. Added to the unemployment rate that brought the misery index to 20.6%. A huge number. To be fair Carter tapped Paul Volcker to be Fed Chairman and he began the policy of reigning in inflation. But Carter did this far too late. The only way to cure high inflation is with a nasty recession. Which Volcker gave Ronald Reagan. But it worked. By 1984 inflation fell 8.8 points or 66.7%. Even with this nasty recession the unemployment rate fell 0.2 points or 2.6%. Which shaved 8.8 points off of the miserable index. Or reducing it by 42.7%. This is why it was morning in America again. The Left to this day say “yeah, but at what cost?” and point to the record deficits of the Reagan administration. Saying this is the price of tax cuts. But they’re wrong. Yes, the debt went up. But it wasn’t because of the tax cuts. Because those tax cuts stimulated economic activity. GDP rose 12.6% by 1984. And tax receipts even increased with those lower tax rates. Because of the higher GDP. By 1984 Reagan’s policies increased tax revenue by 28.9%. And on a personal level the median income even increased 0.4%. And this following a very bad recession a few years earlier. Finally, gas prices fell 22.2%. And the way Americans feel about rising gas prices this was truly morning in America again.

To Top off the General Malaise of the Obama Economy Gas Prices Soared while Median Income Fell

Barack Obama is a Keynesian through and through. A believer in pure demand-side economics. To that end his administration focused everything on increasing consumer spending. Tax and spend policies. Income redistribution. Deficit spending. Anything to make America ‘more fair.’ Raising taxes on the rich so the poor can spend more money. With the Keynesian multiplier they believe this is the path to economic prosperity. Just doing everything within their power to put more spending money into the hands of poorer people. Increasing government regulation, fees and fines as well as taxes to bring more money in Washington so they can redistribute it. Or spend it directly on things like roads and bridges. Or solar power companies. Even paying people to dig a hole and fill it back in. Because these people will take their wages and spend them. Creating economic activity.

So President Obama put Keynesian economics to work. Beginning with a $787 billion stimulus bill. Investments into green energy and the jobs of the future. Like a Department of Energy loan of $528 million to the now bankrupt Solyndra. Which was only one of many loans. The bailout of the UAW pension fund (aka the auto bailout). The government poured $528 million into GM. And President Obama touted the Chevy Volt, boasting that GM would sell a million each year bringing his green goals to fruition (GM is struggling to sell 10,000 Volts a year). A lot of malinvestment as the Austrians would say. But a Keynesian sees any government expenditure as a good investment. Because if all the people who receive this government money spends at least 80% of it (while saving only 20%) the Keynesian multiplier will be five. Meaning that the net gain in GDP will be five times whatever the government spends. So how has that worked for the president? Well, here are his numbers:

The government spent so much money that the federal debt increased by $5.4 trillion. Trillion with a ‘T’. That’s over a trillion dollar deficit each of the president’s 4 years in office. And his last year isn’t even a whole year. Unprecedented until President Obama. And what did all of that federal spending get us after about 4 years? An unemployment rate 2.1 points higher. Or 33.9% higher than when he took office. Inflation fell but it did nothing to spur GDP growth which grew at an anemic 3.1%. Which is less than a percentage point a year. Which is why the Great Recession lingers still. Meanwhile the Chinese are having a bad year with a GDP growth of 7.8%. So all of that spending didn’t help at all. In fact, it made things worse. The economic activity is so bad that even tax receipts fell 2.2% after four years of President Obama. Which has many in his party saying that we need to raise tax rates. Contrary to what Ronald Reagan did. And to top off the general malaise of the Obama economy gas prices soared 107.6% under his presidency. While the median income fell 7.3%. One has to look hard to find any positive news from the Obama economy. And there is one. Inflation did fall. But even that really isn’t good. As it may be an indicator of a looming deflationary spiral. Giving America a lost decade. Like Japan’s Lost Decade.

The Flaw in Keynesian Thinking is that it Ignores the Layers of Economic Activity above the Consumer Level

So there you have an Austrian and a Keynesian. Both entered office during bad economic times. Although things were much worse when President Reagan took office than when President Obama took office. The misery index was 20.6% in 1980. It was only 11.6% in 2008. About half as bad for President Obama than it was for President Reagan. It came down 16.4% under Obama. But it came down 42.7% under Reagan. Which is why it isn’t morning in America under President Obama. Reagan increased tax receipts by 28.9 % by the end of his first term. They fell 2.2% under Obama. Adjusted for inflation Reagan averaged annual deficits of $348 billion. That’s billion with a ‘B’. Obama averaged $1.324 trillion. That’s trillion with a ‘T’. Or 280% higher than Ronald Reagan. Gas prices fell 22.2% under Reagan. They rose 107.6% under Obama. Median income barely rose 0.4% under Reagan. But it fell 7.3% under Obama. In short there is nothing in the Obama economic record that is better than the Reagan economic record.

And why is this? Because Obama’s policies are Keynesian. While Reagan’s policies were Austrian. Reagan focused on the stages of production to improve economic activity. Cutting taxes. Reducing regulatory compliance costs. Creating a business-friendly environment. A system that rewarded success. Whereas Obama focused on consumer spending. Tax, borrow and print (i.e., quantitative easing). So the government could spend. Putting more money into the pockets of consumers. Which stimulated only the last stage in the stages of production. So while some consumers had more money it was still a business-unfriendly environment. Where tax, regulatory and environmental policies (as well as the uncertainty of Obamacare) hindered business growth everywhere upstream from retail sales. From raw material extraction to industrial processing to construction to manufactured goods. Where these Obama’s policies punish success. For the bigger you get the more you pay in taxes and regulatory compliance costs.

The greatest flaw with Keynesian economics is that it looks at aggregate supply and demand. With a focus on consumer spending. And ignores the layers of economic activity that happens before the consumer level. The Austrian school understands this. As did the British when she became one of the greatest empires of all times. As did America during the 19th century. No nation became an economic superpower using Keynesian economics. Japan grew to be a great economic power during the Fifties and Sixties. Then went Keynesian in the Eighties and suffered their Lost Decade in the Nineties. Some Keynesians like to point to China as an example of the success of Keynesian economics. But they still have a fairly restrictive police state. And their economic policies are hauntingly similar to Japan’s. Some have even posited that it is very possible that China could suffer the same fate as Japan. And suffer a deflationary spiral. Resulting in a lost decade for China. Which is very plausible considering the Chinese practice state-capitalism where the state partners closely with businesses. Which is what the Japanese did in the Eighties. And it hasn’t been great for them since. As it hasn’t been great in America economically since the current administration.

The Federal Debt is Bad; what we’re Adding is Worse than can be Imagined

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.

This gap between spending commitments and revenue last year equals more than one-third of the nation’s gross domestic product.

The current outstanding U.S. debt is $14 trillion and change. So, in addition to that debt, the U.S. has to borrow an additional $61.6 trillion sometime in the future. Meanwhile they debate deficit reduction in Washington. And the Obama administration is desperately trying to get the Republican-controlled House to raise the legal debt ceiling. By a whopping $2.4 trillion. You don’t have to be a whiz kid to see that something bad financially is coming this way.

Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.

Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.

It’s those social democracy things. The same things that are bankrupting countries in the European Union. Free health care. And free pensions (with everyone living longer people are collecting far, far more than they ever paid into these programs). Which just goes to show that free things are very expensive.

The $61.6 trillion in unfunded obligations amounts to $527,000 per household. That’s more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.

Imagine yourself living as you are. Working hard to pay your bills (mortgages, car loans and other debt). And then adding another mortgage to the mix for a magnificent half-million dollar home. Only without the home. Just the mortgage payments. If you’re not good at imagining that’s okay. Because you’ll be living it within 20 years. Can it get worse?

The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund’s key asset: federal IOUs.

Why, yes. It can. While you struggle to pay these enormous bills you can think about this. Your civil servants. The people that work for you. They will be making about $173,000 more in retirement than you. Their boss. That ought to put a smile on your face. And a skip in your step.

Here Comes National Health Care

And it’s going to get worse. Because national health care is coming (see Study Sees Cuts to Health Plans by Janet Adamy posted 6/8/2011 on The Wall Street Journal).

A report by McKinsey & Co. has found that 30% of employers are likely to stop offering workers health insurance after the bulk of the Obama administration’s health overhaul takes effect in 2014.

The findings come as a growing number of employers are seeking waivers from an early provision in the overhaul that requires them to enrich their benefits this year. At the end of April, the administration had granted 1,372 employers, unions and insurance companies one-year exemptions from the law’s requirement that they not cap annual benefit payouts below $750,000 per person a year.

But the law doesn’t allow for such waivers starting in 2014, leaving all those entities—and other employers whose plans don’t meet a slate of new requirements—to change their offerings or drop coverage.

Bill Clinton lost the 1994 midterm election because he campaigned as a moderate and governed as a liberal. With Hillarycare being the poster child of his liberal agenda. Barack Obama lost the 2010 midterm election because he campaigned as a moderate and governed as a liberal. With Obamacare being the poster child of his liberal agenda. The people spoke. Then. And now. They don’t want national health care. That’s why Hillarycare failed. And why they watered Obamacare down to be something short of national health care. But Obamacare will serve its purpose. It will kill the private health insurance market. Setting the stage once and for all for national health care in the United States.

In surveying 1,300 employers earlier this year, McKinsey found that 30% said they would “definitely or probably” stop offering employer coverage in the years after 2014. That figure increased to more than 50% among employers with a high awareness of the overhaul law.

The Obamacare legislation was something like a thousand pages long. Guaranteed to confuse. In fact, it was so confusing that Democrats voted for it without reading it. Republicans read as much of it as they could. And because they saw what was in it they voted against it. Those who take the time to read it don’t like it. Including the 50% of employers surveyed.

The nonpartisan Congressional Budget Office, in a March 2010 report, found that by 2019, about six million to seven million people who otherwise would have had access to coverage through their job won’t have it owing to the new law. That estimate represents about 4% of the roughly 160 million people projected to have employment-based coverage in 2019.

So let’s crunch some numbers. Private insurers can’t cap benefits below $750,000 per person per year. Some 6-7 million people will lose their insurance because of Obamacare. So if the government has to pick up the costs for half of the lower amount (3 million) of these people consuming $750,000 each that comes to…$2.25 trillion. That’s a lot. Now let’s say the 160 million who have employment-based coverage lose it. And that half of them need $750,000 in benefits. That comes to…$60 trillion. How about that? That’s about the same as the amount of the government’s unfunded financial liabilities.

So, in addition to the $14 trillion or so in debt, there may be another $120 trillion that we’ll have to borrow. And that’s a little more than the $2.4 trillion the Obama administration is desperately trying to get the House to approve. And warn about dire consequences if the Republicans refuse to do so. This reminds me of that scene in Jaws where Chief Brody was throwing out that chum to attract the shark. It worked. The shark appeared. Only it was a lot bigger than Brody thought it’d be. He told Captain Quint, “You’re gonna need a bigger boat.” Because fighting a $120 trillion debt with a $2.4 trillion dingy is going to lose the battle. And by ‘lose the battle’ I mean the United States will end up like Greece. Only without anyone big enough to bail her out.

OPEC not increasing Oil Production, no Help for Depressed Economies

That’s some pretty doleful news. Maybe there’s a white knight rushing to the rescue. Perhaps the economy will rebound and go gang busters. Maybe the United States will grow itself out of this debt sinkhole (see OPEC Keeps Lid on Oil Production Targets by The Associated Press posted 6/8/2011 posted on The New York Times).

OPEC decided on Wednesday to maintain its crude oil output levels and meet again within three months to discuss a possible production increase.

The decision was unexpected and reflected unusual tensions in an organization that usually works by consensus.

Saudi Arabia and other influential oil-producing nations had pushed to increase production ceilings to calm markets and ease concerns that crude was overpriced for consumer nations struggling with their economies.

To quote a line from Planes, Trains and Automobiles, they have a better chance of playing pickup sticks with their butt cheeks. The moratorium on oil drilling in the Gulf of Mexico put pressure on supply. Then the unrest in the Middle East and North Africa added more. The recession had kept oil down for the last year or so. But with supply being squeezed that wasn’t going to last. It’s back up. With an assist from Ben Bernanke. Whose quantitative easing devalued the dollar and sparked some inflation. For we buy and sell the world’s oil in U.S. dollars. So consumer prices are up. While high unemployment and flat wages continue to make life hard for the American consumer.

Those opposed were led by Iran, the second-strongest producer within the Organization of the Petroleum Exporting Countries…

Iran and Venezuela came to the meeting opposing any move to increase output, which would have probably lowered prices for benchmark crude from the present levels of around $100 a barrel.

But OPEC powerhouse Saudi Arabia, which favors prices of around $80 a barrel, wanted higher production levels — and served notice that it was prepared to raise production unilaterally, to close to 10 million barrels a day from its present daily production of about 8.7 million barrels.

How about that? Our enemies want to keep the price of oil up. While our friends want to bring it back down to $80 per barrel. Yet the Obama administration demanded that Mubarak step down from power in Egypt (a move the Saudis did not like as Egypt was anti-Iran and kept a lid on radical Islam like the Muslim Brotherhood) while doing nothing to help the democracy movement in Iran. And Obama himself has a close and personal relationship with the Venezuelan dictator. Hugo Chavez.

Policies like these will do little to bring the price of oil down. Or make the economy rebound and go gang busters. So there’s little hope of the U.S. growing its way out of their unfunded financial obligations.

Monetary Policy doing more Harm than Good

At the time the Fed began its second round of quantitative easing, inflation was low, so Bernanke felt comfortable instituting a program that would see $600 billion injected into the economy. After all, how much inflation can $600 billion cause when the country has a national debt load of $14 trillion and a personal debt load of $30 trillion?

Inflation has jumped in the last three months at a much faster pace than historical averages. The consumer price index rose by 6.1% annually during the April quarter, and core CPI, which excludes food and energy, rose by 2%. Such an accelerated move in inflation would be explainable if there was strong economic growth, but that’s not the case.

Higher prices without economic growth. We saw this in the Seventies. Under Jimmy Carter. His treasury secretary, Paul Volcker, raised rates to reduce inflation. Interest rates soared. But he tamed inflation. And he didn’t do it with quantitative easing. He did it by doing the exact opposite. Bernanke could learn a lesson from Volcker.

“If you’re Bernanke and you are seeing this rapid acceleration in core inflation and a high unemployment rate, you got to be thinking to yourself, ‘Gee, my models aren’t working right,'” says Drew Matus, senior U.S. economist at UBS Investment Research. “This should cause more caution in the part of the Fed and it is this caution that will keep them from doing QE3.”

Yes. The models don’t work. They’ve never worked. And never will. Because monetary policy is not the be all and end all of economic activity. Think of it this way. Say there is a restaurant not doing well. The Keynesian would help that restaurant with monetary policy. It would lower prices on the menu. To make the menu items cheaper (like making money cheaper to borrow from a bank). The only problem is that this restaurant has problems. People aren’t going there. The food is bad, the service is poor and it’s dirty. Lowering the menu prices isn’t going to fix those problems. So lowering prices is not going to bring the people back. Just as making money cheap to borrow won’t bring the consumers back to the market.

People need Disposable Income and Responsible Government

Unemployment is high. A lot of people have no jobs. Or disposable income. Meanwhile, prices are going up. Leaving even less disposable income. Businesses aren’t going to borrow cheap money to hire people to expand production. Because current production levels are already in excess of current demand.

People need disposable income. Inflation is taking that money away from the people. And two things are driving inflation. High oil prices (demand greater than supply). And bad monetary policy (a devalued dollar increases the price of oil and everything else). We need to fix these things. We need to drill. We need to increase American production of oil. And we need to stop printing money. We need to do these two things ASAP.

Then we need to address the insanity of spending money we don’t have. And stop it. Sooner or later, we have to address entitlements. Actually, later may no longer be an option. With $60 trillion in unfunded liabilities in the pipeline. And with Obamacare potentially adding another $60 trillion. That’s just too much. Trying to pay this will kill economic activity. It will require more taxes, more borrowing and more printing. Everyone of which will increase the cost of doing business or investing. Which will ultimately kill jobs. Giving people even less disposable income.

Benjamin Franklin warned, “When the people find that they can vote themselves money, that will herald the end of the republic.” That’s why they designed the republic to have disinterested, responsible people between the treasury and the people. But that was then. When disinterested, responsible people were in government. Perhaps not everyone, but enough to keep the republic solvent. Today most serve themselves. The treasury is just a tool to buy votes. And to hell with the consequences because most of them will be dead by the time the republic ends.

So don’t expect them to do the right thing anytime soon. Because doing the right thing will not make their lives better. Only ours.